Financial Engineering of a Reverse Twin-Win Certificate through Replication Method

Abstract This paper examines a rarely studied type of structured product—reverse twin-win certificates—focusing on their design, pricing, and potential for risk management and portfolio diversification. It introduces two versions of the product: capped and uncapped, each offering different risk-return profiles depending on market conditions. These certificates are applied to the case of a Bulgarian technology company, representing an emerging market context where such instruments are largely unexplored. The pricing is carried out using a widely accepted method that replicates the product’s return using a combination of basic financial instruments and financial options. This approach allows for transparent and flexible valuation. Numerical simulations show that uncapped reverse twin-win certificates perform well in strongly declining markets, offering high upside when the underlying asset falls sharply. Capped versions are more conservative, limiting both risk and return—making them more appropriate for cautious investors or moderately volatile markets. The study highlights how structured products like these can be adapted to different investment strategies, from speculation to hedging. It also contributes to the literature by extending structured product analysis to the underrepresented setting of emerging markets.